The effect of advance notice of plant closings on firm value

Journal of Management, Fall, 1994 by Sharon K. Clinebell, John M. Clinebell

An important issue in the 1980's was the issue of displaced workers. Displaced workers are defined as "individuals who had three of more years of tenure with their employer and who lost a job due to either a plant or business closing or moving, slack work, or the elimination of their position or shift" (Herz, 1990, p. 22). Using this definition, 4.6 million workers were displaced between 1983 and 1988 (Herz, 1990). Workers who lost their jobs due to plant closings accounted for 57.9 percent of those displaced workers or approximately 2.7 million workers. The large number of displaced workers has brought the issue of advance notice increased attention. One area of interest is what effect, if any, the amount of advance notice of plant closings has on firm value.

Given the potential strategic management and financial implications advance notice has for companies, an interdisciplinary approach will be used to examine the effect of advance notice of plant closings on organizations. An interdisciplinary approach regarding issues of concern to both disciplines has been encouraged by many researchers (Jemison, 1981; Bettis, 1983; Peavy, 1984). Additionally, Lubatkin and Shrieves (1986) and Rappaport (1981) argued that stock prices are important strategic variables. The purpose of this paper is to examine the effect, if any, that advance notice of plant closings has on firm value. Subsequent implications for strategic management also will be discussed.

Research Issues

There are two divergent streams of research concerning plant closings, layoffs and related firm activities. The first stream of research examines the human costs of these activities. This research approach uses an individual level of analysis. It has been found that individuals who lose their jobs have negative attitudes, adverse health consequences, increased alcoholism, and reduced psychological well-being (Brenner & Bartell, 1982; Burke, 1985; Iversen & Sabroe, 1988; Liem & Liem, 1988; Kessler, Turner & House, 1988; Warr, Jackson & Banks, 1988; Dooley & Catalano, 1988). An area in Pennsylvania that lost 20,000 steel jobs reported suicide rates twice the national average, a divorce rate among the jobless that is double that of the employed, and growing incidences of domestic violence (Thompson, 1985).

The major advantage of advance notice is the time it gives workers and the communities to adjust to the loss of the plant. With this time, workers could look for other jobs, enter retraining programs and watch their finances more closely. Studies have examined the impact of advance notice on length of time without work experienced by displaced workers and on their subsequent earnings (Addison & Portugal, 1987; Love & Torrence, 1989). It was found that advance notice reduced the duration of time without work, but no impact on subsequent earnings was found. Another advantage of advance notice is that communities would have the opportunity to attempt to attract other businesses. Opponents of advance notice legislation list impaired efficiency of the work force, apathy on the part of workers concerning their job and the company, increased potential for sabotage, and the premature attrition of the work force as the disadvantages of advance notice (Weber & Taylor, 1987). One fear is that the orderly shutdown of the plant would be affected. However, studies have shown that productivity is not affected (Weber & Taylor, 1987) or is even improved after notice is given that plants are closing (Wall Street Journal, November 11, 1988). The improvement in productivity is related to lingering hopes that good performance can save the plant and also hopes for good recommendations for future employment opportunities.

The second stream of research is concerned with the financial costs and uses a firm level of analysis. Brickley and Van Drunen (1990) examined the effect of internal corporate restructuring on firm value. Unit liquidations were included as forms of internal restructuring. They found positive market reactions to restructuring whether it was due to undertaking expansion opportunities or to improve efficiency.

Statman and Sepe (1989) examined the effect of project termination announcements on the value of the firm. Their results indicated that stockholders responded positively to project termination announcements, especially if there had been prior information concerning the poor prospects of the project. Statman and Sepe suggested that stockholders were happy that they would no longer be supplying money to a project with an unfavorable future.

Worrell, Davidson and Sharma (1991) examined the effect of layoff announcements on stockholder wealth. They found a negative effect on stockholder wealth to layoff announcements attributable to financial reasons. Worrell et al. suggest that stockholders may view layoffs as a signal of financial distress.

Blackwell, Marr and Spivey (1990) found significant negative announcement effects only for plant closings that managers attribute to unprofitable operations. They also found a significant negative market reaction to unanticipated plant closing announcements. They found no significant reaction for anticipated announcements. Blackwell et al. (1990) also found a positive market reaction to plant closing announcements if the market was aware that managers were operating unprofitable plants.